Exposures for financial institutions continue to evolve globally

The financial services industry is going through significant change and Directors and Officers (D&Os) have to navigate their company successfully through a risk environment that continues to evolve rapidly.

In this article we provide an overview of some global and regional trends which AGCS anticipates might continue to impact financial institutions and the financial institutions (FI) insurance market in 2019 and beyond:

  1. Financial institutions directors and officers are facing increasing exposure with the growing willingness of both investors and regulators to hold them accountable for matters that involve culture, governance and oversight responsibilities.
  2. Boards, risk committees and senior management have to demonstrate that they understand the impact of technological innovation, cyber risks, changing consumer preferences and even climate change on their business models and risk profiles and that they are ready to take effective mitigating actions where needed.
  3. From a financial perspective, we have seen pressure on revenues stemming from the low interest rate environment, while since early 2018 stock market volatility has also started to increase.
  4. Banks in Australia, Korea, Malaysia, Singapore and Thailand are experiencing rising household debt while Chinese lenders are exposed to some weak regional economies and reliance on volatile funding.
  5. In the UK, banks have been busy complying with ring-fencing regulation and preparing for the possibility of a turbulent Brexit. In addition, the UK Senior Managers and Certification Regime, including its 2018 amendments, sets out minimum standards of behavior and the Financial Conduct Authority (FCA) expects firms to promote cultures that support the spirit of regulation in preventing harm to consumers and markets.
  6. US regional banks are facing rising shareholder merger objections while Canada is now ranked second to Australia in terms of litigation funding, which might incentivize shareholder activism.
  7. For financial institutions in Europe, Middle East and Africa, 2018 was a year of multiple regulatory deadlines, including the EU’s Markets in Financial Instruments Directive, the Payment Services Directive and the General Data Protection Regulation and potential compliance violations with these regulations has led to higher exposure.
  8. In Southern Europe, we noted Spanish banks’ exposure to Turkish debt and the impact of widening spreads on Italian sovereign debt on the balance sheet of Italian banks.
  9. In Africa, we observe a rise of digital-only banks and some recent high profile company failures, as well as large crime losses, have led to a corporate governance crisis in South Africa.
  10. For financial institutions in Brazil, it is a positive sign that, continuing in 2019, the economy is expected to slowly climb out of its deep recession with new regulation likely to boost the real estate market and mortgage lending.
  1. Globally, conduct risk and operational resilience remain the headliners today. In the UK in particular, senior executives have been placed in the line of fire and companies are facing higher capital charges following a series of outages (technology failures). Adequate data security and cyber resilience is also a key theme in the UK’s FCA’s business plan for 2018-2019.
  2.  In Australia the Royal Commission released its final report “into misconduct in the Banking, Superannuation and Financial Services Industry”. The report identifies areas where the financial sector is expected to make significant changes and where regulatory supervision could be strengthened. It remains to be seen what policy responses will be given to the Commission’s recommendations and how regulated entities will react. It is not unlikely that regulators will take a stronger stance in relation to their enforcement activities.
  3. In recent years, the financial industry has seen fast-growing adoption of financial technology (Fintech). Distributed ledger technology could bring greater efficiency to custody, payments and securities trading. Such technological developments add new challenges to the control of operational risks, including cyber risk and we expect more attention on security standards going forward, also from regulators.
  4. The Basel Committee for Banking Supervision published the final reforms for the calculation of risk-weighted assets which includes new rules for the standardized measurement approach for operational risk as from 2022.
For financial institutions insurance these trends are translating into companies buying more stand-alone transactional risk cover as well as more cyber insurance coverage, in addition to fraud and professional liability. With many financial institutions operating in multiple jurisdictions we also observe a need for more efficient coordination of international programs.

As AGCS we invest heavily in our network and expertise so we can best respond to these evolving needs. This way we support resilience and growth for the sector and provide decision-makers with the peace of mind to run their business.
David Van den Berghe
Global Head Financial Institutions, AGCS
david.vandenberghe@allianz.com
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